PROBLEM

The Hong Kong Japanese School Limited (HKJSL) requires financial support to meet the capital costs of its new primary school.

PROPOSAL

2. The Director of Education (D of E) proposes to grant an interest-free loan of $44,800,000 as capital assistance to the HKJSL towards meeting the capital costs of its new primary school at Tai Po Kau, New Territories.

JUSTIFICATION

3. The HKJSL established the Hong Kong Japanese School as a non-profit-making school in Hong Kong in 1992. The school currently operates a primary section with an enrolment of 1 727 pupils for Primary 1 to 6 at Happy Valley and a secondary section with an enrolment of 445 pupils for Secondary 1 to 3 at Braemar Hill. We granted the existing school sites at Happy Valley and Braemar Hill to the HKJSL in 1973 and 1981 respectively at full market value. With the increase in recent years in the number of Japanese residents in Hong Kong, there is a corresponding growth in the demand for international primary school places of Japanese curriculum. HKJSL expects this growth in demand to continue. As space is not available in the existing school premises for expansion of the facilities to meet the increase in demand, we granted a site at Tai Po Kau to the HKJSL by way of private treaty to build a non-profit-making primary school with at least 40 classrooms.

4. The new Japanese International School, which costs about $240,000,000, has come into operation since mid May 1997. It has 58 teaching rooms for operating 40 classes. The new school building accommodates up to 1 420 students. The school operates two streams, a Japanese Section and an English International Section which is open to all students.

5. The HKJSL submitted an application for an interest-free loan in April 1996 towards meeting the capital costs of the new school building. Construction works commenced in June 1996. To tide over the period pending a loan from Hong Kong Government, the HKJSL has arranged bridging loans with a number of commercial banks. As the Japanese International School is a non-profit-making international school and there is an identified shortfall of international school places of Japanese curriculum, the HKJSL is eligible, and has applied, for capital assistance in the form of an interest-free loan of up to 100% of the building cost of a standard design primary school. The loan, if approved, will contribute towards repayment of the bridging loans which the HKJSL has taken out to finance the construction of the new school building. Although the new school has come into operation, the present proposal is in line with our policy to allow an international school to draw down the loan, if approved, only upon completion of the school building.

FINANCIAL IMPLICATIONS

6. The Director of Architectural Services has advised that the average cost of building a standard aided primary school with 30 operating classes is $44,800,0001 , based on fixed price lump sum contracts at the price level in the fourth quarter of 1995.

1 We use the price level in the fourth quarter of 1995 as the basis for calculating the loan as a standard aided primary school normally takes about 17 months to build and it would have been necessary to award the contract for the construction of such a school in late 1995 in order to have it completed in May 1997.

7. If Members approve the proposal, we will offer to the HKJSL a loan of $44,800,000. We estimate that the amount of interest that Government might have earned otherwise, based on the average yield of five-year Exchange Fund Notes in March 1997 and a repayment period of ten years, would be about $19,300,000 in net present value.

CONTROL MECHANISM

8. In line with existing policy, the loan to the HKJSL will be at nil interest. The HKJSL will draw down the loan upon approval by Members. It will repay the loan over a period of ten years. The first instalment of the loan repayment will become due one year after the HKJSL draws down the loan. We will make repayment of the loan a first call upon the liquidated assets of the school in the event it closes down. In case of default of repayment of the loan, the D of E may take possession of the premises and assets of the school. We will specify these terms and conditions in the loan agreement and secure the loan by a legal charge.

BACKGROUND INFORMATION

9. We recognise the importance of international schools to the expatriate community which contribute to the continued development of Hong Kongs economy. International schools cater mainly for the needs of children in the expatriate community. In the past few years, international schools have also provided education for children of emigrants who have returned to Hong Kong. To ensure an adequate supply of international school places, Governments policy is to offer support to non-profit-making international schools. The support includes the grant of land by private treaty for those schools which satisfy our assessment criteria and which help meet an identified demand for school places.

10. On 10 October 1995, following recommendations of a Working Group on the Provision of International School Places, the Governor-in-Council approved, among other things, that we should provide interest-free loans to non-profit-making international schools not in the English Schools Foundation as a form of assistance towards the capital cost of building a new international school or an extension. This loan is set at up to 100% of the cost of building a standard design primary or secondary public sector school as appropriate. We set out details of the revised scheme for international schools in the Legislative Council Brief (Ref. EMBCR 15/581/94 III) issued to Members on 11 October 1995.

11. On 17 January 1997, the Finance Committee approved an interest-free loan of $66,591,000 to the Canadian International School for building a new non-profit-making primary and secondary school at Nam Long Shan Road. The terms and conditions of the loan we now propose to offer to the HKJSL are similar to those applied to the Canadian International School.